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Kumba - Where to from here?

Mining - 25 July 2019

Kumba is enjoying a bumper harvest of profitability and cash flow. The interim dividend is in line with the entire annual dividend in 2018. So far so good for shareholders. The Kumba share price has increasingly reflected an elevated premium for benchmark 62% Fe iron-content fines, driven by China’s city pollution curbing and cleaner steel industry initiatives. This demand for 62% iron ore, together with higher-grade lump ore, has created a bifurcated market, with lower grade 58% iron ore at a discount. Kumba’s Sishen mine produces even higher-grade ore at 65% Fe fines. The commodity industry has had its share of booms and busts and given the sensitivity of Kumba to movements in the rand and iron ore, a fairly small change up or down on pricing, if maintained over a year, has a disproportionate effect on profitability. Whilst the year to December 2019 will end on a firm note we believe this is as good as it gets for now. This note guides investors on sensitivity to variables and we update our through-the-cycle fair value on the stock.

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